BRRR? Why not try the BRAT!
Like many investors I have tried the BRRR method with success, but like many others I have also had issues with one significant step of the BRRR method, the refinance. For those not familiar with what BRRR stands for, it is buy, renovate, refinance and repeat. So if you buy a house for 50,000 and renovate for 15,000 and it's ARV is 100k, then you can take out a new loan at 75-80% of the ARV at this point provided it appraises for 100,000. This is a big if. I once had a property I bought for 17,000 cash, and put 7,000 in repairs in within 3 months of purchasing it. I felt the ARV on the property was 50-55,000, but what happened when the appraisal came back in 6 months after rehab? It came back at 24,000. Rather than risk another bad appraisal that I paid for out of pocket and walk away empty handed, I sold the home 1.5 months later for 53,000 and used the proceeds to buy more real estate. For this reason I have always felt the process is flawed because an appraiser could blow up the whole deal.
But what about the turnkey properties that you just negotiate a great deal on? Banks don't typically like to lend more than what you actually bought the property for without doing renovations for up to a year. Introducing the BRAT method. The BRAT method stands for Buy, Rebate and Avoid Taxes. It's really only two steps but the last step is making sure you or your CPA files your taxes correctly. So let's use a real life example. Recently I purchased a duplex for 175,000, where it actually appraised for 177,000. At first glance that does not seem like that great of a deal, but how I structured the deal is where it comes into importance. The seller wanted to sell me the property for 155,000, and while that was a decent deal I did not want to tie up 20-25% of the purchase price into the duplex because I knew that it would have to be 6 months to a year before I could pull out the appraised value, and then I would have to have it reappraised. I simply did not have to do anything to the place to start renting it out., so I tried the BRAT method. I told the seller that I would get them their 155,000 purchase price if they were fine with two conditions 1) they were fine with me evicting their tenants because I had to raise rents to make their price work and 2)I could write a commission on the property over and above the agreed on price so it would lessen my out of pocket burden and increase my return on cash invested, BUT still get them their price. The sellers agreed so on closing day I came with 25% down of 175,000, or 43,750, but then immediately at closing my wife the buyers agent rebated me back the 20,000 commission on the property. This latter part is important because by rebating me the 20,000 commission my wife and our business is not taxed on the commission but rather the cost basis on our property is reduced to 155,000. So at the end of the year my accountant will create a 1099 for my wife to give to me for purchasing the property and then my accountant will factor in deprecation on the property on cost basis of 155,000, not the purchase price of 175,000. It's almost like a 1031 exchange in that 20,000 I saved is not treated as income but deferred to when I sell the home years later.
Wait a minute?!?!?!?!? "The bank actually allowed that?," is probably what you are asking. Simply the bank does not care, nor do they know because they got a larger loan amount which is more interest to collect, the property appraised and the banks lends on the purchase price on the purchase agreement. The bank does not even know what the commissions are unless they ask which we never had had them ask. The method can be applied to commercial deals and most turnkey or close to turnkey properties. You save time on refinancing, wasted appraisals and the cost of having to refinance by doing it all up front. Most importantly the appraiser only sees the purchase price and terms of a deal when they appraise and if for some reason the deal does not appraise you can always lower the price. In this case if the property only appraised for 165,000, we simply would have dropped the price to 165,000 with a 10,000 agent commission.
Now look at what this does to my ability to invest more and my cash on cash return.
Mortgage, Taxes and Insurance 1030
Gross Rents 2050
Annual Cashflow (property is managed by our business) 12,240
Capex first year: None, because it was turnkey.
Actual amount brought to closing subtracting rebated commissions: 23, 750
First year cash on cash return: 51%
If you are not a realtor, you can still apply the same principles but instead let your realtor take their usual 3 percent, and have them rebate everything over that. If you have interest in discussing this strategy or listening to others, follow our business page at
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